Smaller Companies Are Driving Job Creation

The U.S. continues to have a very low unemployment rate historically, at 3.9 percent. It’s the lowest reading in 50 years. Yet wage growth has lagged, rising just 2.6 percent, and the recent unemployment figures included 236,000 workers leaving the workforce, not the creation of jobs. Economists and business leaders are growing increasingly concerned that, despite the rosy-seeming blush of low unemployment, American workers aren’t actually doing better in some respects.

The unemployment rate is currently very low…

Job Creation Will Likely Continue to Be an Issue…

The direction and expansion of both job and wage growth are very likely to continue to be an important issue across the country as a result, for several reasons. First, as a recent Forbes article points out, the U.S. has historically led the world in innovation and technology news, but that may be changing. The U.S. is doing very well at innovating, but other countries are also doing very well. They are making major investments in artificial intelligence (AI) and life sciences, among other sectors.

Second, companies may no longer be able to count on governments offering financial incentives to them to stay or relocate. The recent withdrawal of support by key New York government officials led Amazon to pull out of its plans to develop part of its second headquarters in New York City. The idea that drove the officials was that too much incentive on taxes and other government aid may result in a bad deal for governments and tax-payers.

Third, automation is very likely to proceed apace. High employment levels can spur it because companies become very aware that they need more hands than there are hands available (human, anyway). So can low employment levels, because companies search for ways to cut costs during recessions, and automation can cut costs.

…but innovation will be required to keep it that way.

…and Small Companies That Survive Their Early Years Are the Strongest Job Creators

All these concerns center around job growth and where it is likely to originate. To ascertain this, it helps to have an idea of which kind of companies have driven job growth in the past.

Somewhat surprisingly, data indicate that it is smaller companies that drive job growth across the U.S., according to a Small Business Administration (SBA) report mentioned in Forbes. Big firms, with more than 500 employees, have created only roughly 30 percent of U.S. jobs in the past eight years.

Yet it isn’t every smaller company, either. A very high percentage of small companies, 75 percent, fail within the first years after their founding. Companies with 20 to 500 workers who have survived at least five years have historically had the greatest impact on job creation, and job creation occurs most robustly in that first half decade. The number of years a company survives is a highly important predictor of job creation.

The highest number of jobs are created by start-ups that double their sales within a four-year period and hire extensively within that period as well. These startups account for a fraction of businesses started, but they have a disproportionally robust effect on job creation.

The Forbes article goes on to suggest that many government resources aimed at startups, such as SBA loans, research funding, and technology transfer, focus on this combination of new businesses that have made it through the initial five-year period and are developing new jobs at a rapid rate. Currently, many of these programs focus on the start-up component alone, not the survival rate or job creation. Focusing on job creators would power the U.S. economy and its leadership in innovation.